Outlook mixed for Areva

Areva's first half results show immediate impact from the Fukushima accident and Germany's new nuclear policy, although it stands to benefit from a surge of safety engineering work.

Cancellation of orders for uranium and nuclear fuel came to €191 million ($273 million) in recent months, with many Japanese reactors remaining offline and German utilities moving to accommodate Chancellor Angela Merkel's order to shut down eight units. Another €700 million ($1.0 billion) in orders "present a risk of cancellation or renegotiation" for Areva, the company said in results for the first half of 2011.

The effect of this was to reduce the company's order book - but only by about 2%. It still stands at some €43.1 billion ($61.6 billion).

Another repercussion of the Fukushima accident is a new global effort to re-assess nuclear power plant safety margins, with the likely result that many plants will be upgraded. Depending on the conclusions drawn by the world's regulators and the individual circumstances of each power plant, upgrading safety could cost €100-200 million ($140-280 million) per plant, said Areva. It has established the Areva Safety Alliance program to engage in this kind of post-Fukushima analysis and engineering work.

A bullish presentation to investors outlined the company's views on the long-term prospects for nuclear power. "The fundamentals underpinning the development of the nuclear market are unchanged: strong growth in demand for electricity in the coming decades, diminished fossil resources, the search by many countries for energy independence, and the growing need to address climate issues," said President and CEO Luc Oursel.

Areva predicts nuclear capacity will grow at an average rate of 2.2% per year to 2030. In that time, 258 GWe is scheduled for closure, although 159 GWe of that could be refurbished and relicensed for longer operation. Adding 304 GWe from new units takes nuclear generating capacity to 584 GWe in 2030, up 54% on today.

Results

Areva recorded an operating income of €710 million ($1.0 billion) for the first half of this year with the biggest contributor a €648 million penalty that Siemens had to pay after violating a shareholder agreement related to their Areva NP joint venture. The change in the make-up of Areva NP, as well as the sale of shares in STMicroelectronics, helped to reduce overall net debt by €900 million ($1.2 billion).

Apart from the payment from Siemens, operating income for the last six months was just €62 million ($88 million), compared to €213 million ($304 million) in the first half of 2010.

However, 2010 also saw a €417 million ($596 million) provision for overrunning reactor build projects. No such provisions were needed in the first half of this year, while revenues from the reactor business totalled €1.6 billion ($2.2 billion). The reactors and services business recorded smaller negative earnings of €113 million ($161 million) compared to €199 million ($284 million) in the same period last year. Managers said this improvement in performance was the major factor in an overall improvement of gross margin to 17.3% of revenue, up from 9.3% in the first half of last year.

The most profitable business department for Areva was waste and used fuel management in the so-called back-end of the fuel cycle. This recorded earnings of €228 million ($326 million) from revenues of €830 million ($1.1 billion). Also strong was uranium mining and the front-end, with earnings of €251 million ($358 million) from revenue of €1.4 billion ($2.0 billion). Besides reactors and services, the other loss-making business area was renewables, with negative earnings of €63 million ($90 million) after revenues of €59 million ($84 million).